A grocery store’s arbitration policy was so one-sided that it “shocked the conscience” under California law and was unenforceable, the U.S. Court of Appeals for the Ninth Circuit has ruled, citing in part a provision requiring employees to split the arbitrator’s fees down the middle. Chavarria v. Ralphs Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013). The Court affirmed the denial of the employer’s motion to compel arbitration and returned the case to the district court for further proceedings. 

Background

When Zenia Chavarria applied for a position with Ralphs Grocery Company, she signed an employment application stating that she would be bound by the company’s mandatory and binding arbitration policy. Chavarria was employed as a deli clerk for six months. Thereafter, Chavarria filed a class action against the company, alleging that it violated various provisions of the California Labor Code and the Unfair Competition Law. Ralphs moved to compel arbitration; Chavarria opposed the motion, arguing the arbitration policy was procedurally and substantively unconscionable under California law. The district court granted the motion, and Ralphs appealed.

The case focused on two key provisions in the arbitration policy: the arbitrator selection provision and the fee provision. The arbitrator selection provision provided that, unless the parties agreed otherwise, the arbitrator must be a retired federal or state judge. If the parties could not agree on an arbitrator, they would propose a list of three names and alternately strike one name from the other party’s list until only one name remained. The party who did not demand arbitration would strike first. Consequently, the last remaining arbitrator would be one selected by the party not demanding arbitration.

The fee provision provided, among other things, that the arbitrator’s fees would be apportioned at the outset of the arbitration and split evenly between the company and the employee unless a decision of the U.S. Supreme Court directly addressing the issue required that the fees be apportioned differently. The arbitration policy also limited the arbitrator’s authority to award costs.

Applicable Law

The Federal Arbitration Act provides that agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The California Supreme Court has made clear that unconscionability remains a valid defense to a petition to compel arbitration as long as the defense is not used as an “obstacle to the accomplishment of the FAA’s objectives.” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011).

Under California law, an arbitration agreement must be both procedurally and substantively unconscionable for it to be invalidated. A sliding scale is used to assess procedural unconscionability in proportion to substantive unconscionability: the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (Cal. 2000). 

A court examines two factors in passing on a question of procedural arbitrability: oppression and surprise. “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (Cal. Ct. App. 1997). Substantive unconscionability occurs in the employment context when an arbitration agreement is “one-sided” in favor of the employer without sufficient justification. Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064 (Cal. Ct. App. 2003).

Policy Found Unconscionable and Unenforceable

The company argued that the arbitration agreement was not procedurally unconscionable under California law because it did not require employees to sign the agreement as a condition of employment. It contended that it could have hired Chavarria even if she did not sign the employment application, as suggested by the use of the word, “please,” where the application requested a signature. The appellate court squarely rejected this argument because the arbitration policy stated that no signature was necessary for it to apply to covered disputes, noting “that Ralphs asked nicely for a signature is irrelevant.” Further, the Court found the arbitration policy was presented on a “take it or leave it” basis, and Chavarria had no opportunity to negotiate its terms. Indeed, the Court observed, the company did not provide Chavarria with a copy of the policy until three weeks after she had signed her employment application. Accordingly, the Court concluded the arbitration policy was procedurally unconscionable.

Turning to substantive unconscionability, the Court found the arbitrator selection and fee provisions troubling. The company conceded the selection procedure disadvantaged the party demanding arbitration. However, it maintained the procedure would not always disadvantage the employee because, in cases involving motions to compel arbitration, the company would be the one demanding arbitration. The Court did not agree, calling the argument a “fanciful interpretation” of the arbitration policy. It pointed out the policy required that a demand for arbitration follow the pleading requirements in the Federal Rules of Civil Procedure and a motion to compel did not satisfy those requirements. Even after filing a court action, the policy required the employee to file a demand for arbitration, and, as a result, the Court said, the company would get “to pick the pool of potential arbitrators every time an employee brings a claim.” 

Addressing the fee provision, the company argued that it was not unconscionable because it followed the “American rule,” requiring each party to bear its costs. The Court disagreed because the policy required Chavarria to pay one-half of the arbitrator costs up front, regardless of the merits of her claims and any potential state law contradicting this allocation. Also, the arbitration policy limited the arbitrator’s authority to award costs. The costs that Chavarria would bear likely would dwarf the amount of her claims, the Court stated. Thus, the Court ruled this provision acted as a “prohibitive obstacle to having her claim heard.” Accordingly, the Court concluded the arbitration agreement was substantively unconscionable.

Concluding that the company had “tilted the scale so far in its favor, both in the circumstances of entering the agreement and its substantive terms, that it ‘shock[ed] the conscience,’” the Court found the arbitration policy was unenforceable and affirmed the denial of the motion to compel arbitration.

This case, together with the California Supreme Court’s decision in Sonic-Calabasas A, Inc. v. Moreno (for details, please see our article, California Supreme Court: Federal Arbitration Act Preempts State Labor Hearing Waiver Rule), confirms that California state and federal courts will continue applying California’s unconscionability law to employment arbitration agreements.